Exiting the Eye of the Storm

Louis James: So, Doug: London has suffered more damage from recent
rioting than from anything else since the Blitzkrieg; the stock market had
its most volatile week in years; gold shot well north of $1,800; and the U.S.
government almost crashed into its debt ceiling. Smells like blood in the streets.
What does a street fighting man like you make of all this?

Doug Casey: Well, it was about 40 years ago in 1971 [laughs] when I
read Harry Browne's first book, How to Profit from the Coming Devaluation.
In that book, Harry said that if gold went as high as $200, it would be a sign
runaway inflation was coming, and readers might need their survivalist retreats,
etc. He was actually right about everything he said in the book, and for the
right reasons, but things didn't get as bad as quickly as Harry thought they
would.

That just goes to show that if you predict any particular number or outcome,
you should not say when it will happen, or if you predict a time for important
events, you should not say specifically what will happen.

Anyway, I'm very uncomfortable predicting serious gloom and doom for two reasons:
One, most individuals intuitively look out for themselves by producing more
than they consume and saving the difference - so the amount of net wealth in
the world grows. Two, technology continues to improve - Moore's Law and all
that.

L: I've heard you say that before, but you're the guru, so you don't
get off so lightly. What do you feel comfortable telling us?

Doug: My sense is that we are definitely exiting the eye of the storm
at this point, and we're heading back into the raging winds of financial, political,
and social turmoil. The riots you see now are just an indicator of what's ahead
- an appetizer... hardly the main course.

L: That's a pretty bold statement, Doug. We've been talking about the
so-called recovery really being nothing more than the eye of the financial
storm that hit in 2008. But the U.S. and other governments around the world
have been able to animate the corpse of the 20th-century economy and keep an
appearance of life in its zombie motions longer than we thought possible. To
say we're exiting the eye of the storm implies that zombie is going to stop
moving and the smell of decay will soon overpower everything else. Are you
ready to make that call?

Doug: You're asking me to do what I just said was unwise: to say both
what and when. But yes, it does look grim to me. With the markets fluctuating
so wildly, the Dow going up and down hundreds of points per day, that's very
likely to spook the government, investors, business managers, and consumers
even more than they already are. Normally I don't pay much attention to consumer
confidence; it's an emotional state, and emotions can change in a New-York
second. But at this point the economy rests on nothing more substantial than
confidence. It's a confidence game. And confidence can blow away like a pile
of feathers in a hurricane.

L: So what we're looking at is not just a bump in the road. It's going
to change priorities and marching orders for market participants - and for
those who interfere in the markets in various ways.

Doug: Yes. It's the kind of thing that accelerates a negative spiral,
in good part because everybody wants the government to "do something," in the
idiotic belief that it can improve things by doing more. Actually it can only
help by doing less.

L: So... the economy slows more. Why can't the government reanimate
the corpse one more time, turning up the juice on the stimulus heart-shock
paddles?

Doug: They've already created trillions more currency units. Most of
these are currently sitting in banks rather than circulating. That's partly
because people are afraid to borrow and banks are afraid to lend, but also
because the Fed is paying banks interest to keep what are considered to be
excess reserves locked up. So these trillions of dollars that were created
to bail the banks out are sitting there, but they're not going to sit there
forever. Once those dollars start circulating in the economy, prices will rise
rapidly.

The other way for prices to really explode would be for the foreigners holding
some six or seven trillion hot-potato dollars to start dumping them. With the
U.S. government clearly unable to deal with its debt and the consequent credit
rating downgrade - which was both inadequate and long overdue - those foreigners
are getting pretty nervous holding dollars. Almost any sort of financial calamity
could spook some central bank into exiting its dollar position wholesale. And
once one of them starts, the race will be on, because no one is going to want
to be left holding the bag.

These are two time bombs that are ticking away right now - the trillions of
dollars outside the U.S. that could come pouring back in, and the trillions
of dollars inside the U.S. that were created to paper over the leading edge
of the storm. Either of those things could bring on the end of the dollar as
we knew it, and both may well happen at once.

L: Okay ... But the state has been very good at convincing people to
pay no attention to the man behind the curtain. If the markets settle down,
why can't people go back to imagining that everything's fine?

Doug: I'm not sure that many people really ever believed there was
a recovery under way. Wall Street acted like there was - but only somewhat,
since banks never started lending again. But unemployment has remained high;
it'd actually be about twice the official 9% level, if it was calculated the
same way it was 30 years ago. And outside of the price collapse of certain
asset classes - like real estate - the cost of living has increased greatly
for most people; the calculation of the government's CPI is as corrupt as its
unemployment numbers. I think it's a mistake to talk about a double dip in
the economy; we entered the Greater depression in 2007 and are still in it.
A "jobless recovery" is not a recovery. The only thing that's recovered is
the stock market, to some degree. Aside from government hocus-pocus, the mirage
of corporate earnings, and foolish investors wanting to believe it was safe
to get back in the water, things have not gotten better. And they are about
to get much worse.

L: That may be so, but the government, the press, and corporate America
have all been talking about a recovery. With the Fed promising easy money,
if the markets calm down, couldn't the illusion of recovery be reestablished?

Doug: I don't think so. The economy isn't going to stay in the eye
of the storm for much longer. The stab of panic we saw last week gave lie to
the emperor's new recovery clothes. It's not just the losses on the stock market,
but gold hitting significant new all-time highs in nominal terms, and Bernanke
saying that the Fed would hold interest rates close to zero for another two
years. That's huge - and a huge mistake. It tells me that Bernanke has truly
panicked. The impact this will have on the dollar cannot be overstated; it's
a guaranteed disaster. It assures that people will do all sorts of things they
would not do without that artificially easy money.

L: Okay, but if they go into debt to buy houses and cars, they'll create
jobs and there will be more appearance of recovery, won't there?

Doug: That'd just be digging the hole deeper at this point. What needs
to be done is to let the market raise interest rates, to encourage savings
- the accumulation of the capital needed to start moving forward on a solid
basis. Instead of encouraging people to work, spend less than they make, and
save the difference, these low interest rates encourage profligacy. They encourage
people to liquidate savings and live above their means. As usual, the government
isn't just doing the wrong thing, it's doing the exact opposite of the right
thing.

L: Because...

Doug: Because of the false belief that printing money stimulates the
economy. The artificially depressed interest rates of today will result in
very high inflation and very high interest rates in the near future. A healthy
economy gets naturally low interest rates as a result of a lot of savings,
a lot of capital creation. A healthy economy has stable interest rates that
relate to the amount of new wealth being created, typically just above the
natural rate of inflation that results from real money - gold - being mined
out of the ground. Artificially low interest rates stimulate malinvestment.

The Fed is also keeping rates low because of the government's massive debt
problem. The U.S. is already running trillion-dollar deficits - if interest
rates go up, say, to 12% like back in the '70s, that would add another trillion
to the deficit right there. Financing a $16 trillion debt at 12%, rather than
2%, equals another $1.6 trillion of spending - just for interest.

This really means they have no choice. The situation is completely out of
control - the U.S. financial house of cards is irredeemable at this point,
even with interest rates at close to zero. The whole financial structure is
close to collapse, and that's why I think we're exiting the eye of the storm.

L: The Titanic has been struck, but Captain Obama just doesn't
yet realize how badly?

Doug: Exactly. And - adding insult to injury - not only are they doing
the opposite of the right thing, they are actively punishing people who did
the right things, who worked hard and saved. Pensioners living on fixed incomes
are being forced to reach for higher and higher yields, which means they are
being forced to put their nest eggs into riskier and riskier investments. This
guarantees that the pensioners and the savers will be wiped out.

L: Unless they put their savings into gold.

Doug: Sure, but nobody but crazy goldbugs even thinks about that. And
it gets worse: The current course guarantees the total destruction of the U.S.
dollar. Again, I cannot emphasize enough how serious this is. People all around
the world save in dollars. If the dollar is destroyed, it won't just be Americans
who're hurt, it will be all the hard-working people around the world who've
struggled to scrimp and save and put money away for future needs. All these
people who were wise and frugal, they are going to be wiped out. They are going
to be left with absolutely nothing. This is criminal - it's the stuff revolutions
are made of. And that's exactly what I expect we'll see plenty of, all around
the globe.

L: Seems so clear - what could they possibly be thinking?

Doug: Perhaps Bernanke's making the same mistake people with maxed-out
credit cards make, when they think hyperinflation will wipe out their debts.
They forget how nasty, brutish, and short life can be in a society in a hyperinflationary
collapse. And think about it: What happens if you wipe out these debts? Who
are the debtors? They are the most profligate people in society. So these artificially
low interest rates reward the most irresponsible and punish the most responsible
people in society.

L: Absolutely perverse.

Doug: [Chuckles] Took the words right out of my mouth.

L: Easy enough to do in this case.

Doug: Well, there's your answer. What's going on now really is creating
the foundation for revolution, and not just in the U.S. The riots in London
and Chile, and other outbreaks of chaos around the world aren't anomalies -
they're a warmup. An overture before the symphony starts. Things will be especially
bad in British and European cities, where there are millions of people who've
never worked. Ever. They've just lived off the state.

L: Maybe we'll hear the music on November fifth.

Doug: "Remember, remember, the fifth of November..." That would be
interesting indeed. Readers should rewatch V for Vendetta to put them
in a proper frame of mind on how serious things are. I mean... it is going
to be a time when Street Fighting Man will be a most appropriate theme
song. Turn up your speakers.

L: I agree with you, Doug, but I have to say it makes me a bit nervous
to come out and say we're exiting the eye of the storm. The powers that be
have proven far more adept at keeping the balls they are juggling in the air
than I ever thought they could be. Every time I think it can't get worse without
things coming apart, it does get worse, and somehow things don't come apart,
they keep going.

Doug: Of course. As I started out saying, Harry Browne's prediction
40 years ago was essentially the same that I'm making today. Harry was a bit
early - and I was too, in 1980. But this time really is different, with so
many unprecedented actions and reactions between the market and the state.
I truly see no way out for the state this time, and it's going to be much,
much worse than it would have been had it collapsed back then. I can't say
for sure exactly when things will fall apart, but I'm more convinced than ever
that they will, and that we are about to plunge deeper into the Greater Depression.

L: What if you're wrong?

Doug: I honestly hope I am, because if I'm right, the global economic
devastation is going to have a very real and significant death toll. The price
in human suffering these fools in government are setting us up for is truly
monstrous. As a human being, of course I'd rather see good times.

L: But as a speculator...

Doug: Yes, as a speculator, I know the crisis will create phenomenal
opportunities. If we lived in a stable society, with a stable monetary order
and a non-predatory government, it'd be impossible to be a reliably successful
speculator, because there'd be few or no politically induced distortions in
the economy to take advantage of. So, always looking on the bright side, we
can look forward to many new bubbles to result from the state's massive interventions
today and in the future.

L: Such as?

Doug: There will be a huge bubble in gold ignited, and maybe soon.
That seems pretty much baked in the cake at this point.

L: That's interesting. A lot of people say gold is already in a bubble
- that the recent surge up to $1,800 per ounce is a sure sign of that. But
you're saying it hasn't even started yet?

Doug: Well, I hate encouraging people to buy gold at $1800 an ounce,
because that level is already more than 700% above the bottom in 2001, and
I'm a bottom fisher. I like bargains, and I can't call gold a bargain today.
But it's plain as day that gold is going to go higher. There's simply no other
place for people to try to safeguard their wealth as the dollar, euro, and
other currencies plummet toward their intrinsic values. What else could people
buy as they get more and more afraid of paper currencies losing acceptance?
What are corporations going to do with the billions of dollars in their treasuries
when their management gets frightened? Where else can they go when they need
to get rid of dollars, euro, yen, and yuan? Central banks, too - what will
they do when they need to dump dollars in favor of something that will hold
value?

This is why I see a bubble in gold still ahead. It has nothing to do with
the supply and demand for gold in the jewelry trade, or whatever - it's going
to be a result of there being no viable alternatives when the paper-money con
game is over. Gold is the ultimate cash, and that's where people will go when
there's a global, total, panic to cash.

L: Agreed. Other investment implications?

Doug: Gold mining stocks. Most good ones aren't bargains, even though
they've been lagging gold in recent trading, maybe because of the fear in the
marketplace. But they're going higher.

L: Of the two major forces that drive markets, greed and fear, which
do you think will predominate going forward? Because there are different buying
patterns, depending on whether it's greed or fear in the driver's seat...

Doug: You're quite right. I think it will be a market driven primarily
by fear for some time, and that will favor profitable producers, emerging,
high-margin production stories, and maybe the best of the best explorers advancing
projects with obvious merit towards production. Nobody buys the risky junior
exploration plays when fear is driving the market.

L: Except a bottom fisher.

Doug: Except a bottom fisher, yes. There will be some fantastic opportunities
in earlier-stage exploration companies that will get smashed because of fear.
But speculators looking for those have to be patient. Many junior explorers
will dry up and blow away during the fear-induced drought. Eventually, the
best will come roaring back when the bubble inflates and the real mania phase
of this bull market kicks in. Then, everything with "gold" in its name will
trade at ridiculous premiums, even the crappiest juniors whose only gold is
in their name.

L: How long before greed kicks back in?

Doug: There you go asking for a time as well as a prediction again.
I don't know, but it could be a while: A lot of greed has been washed out of
the system with the big panic of 2008, the real estate collapse, and the stock
market really going nowhere for the last ten years. Plus, when the bond market
collapses, as I think it will, that will be the final blow. That's really The
Big One on the horizon these days - the bond market is three times the size
of the stock market, so a major reversal there will cause enormous damage.

L: So, stay away from the junior explorers?

Doug: Just the crappy ones - and as you well know, 95% of explorers
have nothing and never will have anything. But there are some which actually
have gold or silver in the ground - or clear drill indications that they are
close to being able to report having such assets - the kind you specialize
in finding for the International Speculator. Those stocks are going
to benefit from the flood of money hitting the precious metals sector. Remember,
the whole gold market is trivial in size. It's only a tiny fraction of the
oil patch, and not even a rounding error compared to the global market. When
the average investor wakes up to the need to own gold for safety and the potential
profit from owning gold stocks for leverage to gold, it's going to be like
trying to fit the contents of the Hoover Dam through a garden hose. Prices
will go ballistic, and there will be plenty of money hitting even the smaller
juniors that have good stories.

L: Good reminder about safety.

Doug: And that's another factor that will be driving the price of gold:
It won't just be speculation, it will be prudence - the flip side of fear.
Prudence will drive people into buying more physical gold. Greed will drive
people into gold stocks. I own a lot of physical gold already, but I'm still
buying, even at these levels. And I own a lot of gold stocks, but I'm still
accumulating those too, when we dig up good opportunities.

I look forward to seeing the pictures I know you'll take on your next rock-kicking
expedition, trying to dig up one of those good opportunities. 'Til next time.

Louis James' background in physics, economics, and technical writing prepared
him well for his role as senior editor of the International Speculator and
Casey Investment Alert. Like Doug Casey, Louis constantly travels the world,
visiting highly prospective geological targets, grilling management and company
geologists, and interviewing natives in a variety of languages to find out
what they really think (he's fluent in French and Spanish, and speaks a little
German and Russian).

Whether it's days of back-to-back meetings with mining company executives
in Vancouver, pounding on rocks in the Democratic Republic of the Congo, examining
drill core in Argentina, or eating food with names he can't pronounce with
local miners in China, Louis is constantly looking for the next double-your-money
winner.

He evaluates dozens of companies every month, conducts due diligence of only
the best, and then compares notes with Doug in order to bring only those most
likely to provide rapid high returns to our subscribers' attention. Louis also
reads all the press releases, financial statements, and an enormous quantity
of related information to keep track of all of our mineral companies and has
become something of a walking database on same.

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